The Housing Bubble

A report from the Agence France-Presse. “Chinese nationals have become the largest foreign buyers of US property after pouring billions into the market in search of safe offshore assets, according to a study. A huge surge in Chinese buying of both residential and commercial real estate last year took their five-year investment total to more than $110bn, according to the study from the Asia Society and Rosen Consulting Group. And despite a slowdown due to Beijing’s subsequent clampdown on capital outflows, the figure for the second half of this decade is likely to double to $218bn, the study said. ‘What makes China different and noteworthy is the combination of the high volume of investment (and) the breadth of its participation across all real estate categories,’ including a ’somewhat unique entry into residential purchases,’ the study said.”

“The authors of the study said their numbers, based on public and real estate industry data, understate the total. They necessarily miss purchases made by front companies and trusts that do not identify the sources of the funds. Geographically, Chinese buyers are concentrated in the most expensive markets: New York, Los Angeles, San Francisco and Seattle. Property in Chicago, Miami and Las Vegas is also popular. That focus means they pay well above the average US home price: last year, Chinese buyers paid on average about $832,000 per home in the United States, compared with the average for all foreign purchases of $499,600.”

From Maclean’s in Canada. “The cash flowing out of China into assets around the world has hit tsunami proportions, driven by fears of a slowing economy and a declining currency. Estimates peg the amount Chinese investors and companies moved out of the country last year at nearly $1 trillion, up more than sevenfold from 2014. A survey of 150 agents in China by Investorist, an Australian company that markets international properties online, found the vast majority of would-be Chinese purchasers, nearly 90 per cent, have a budget between $500,000 and $1 million—not unlike many Canadians who are seeking to buy a home in Vancouver or Toronto these days.”

“‘The majority of Chinese buyers are families that can afford an investment property and possibly a second one,’ says Jon Ellis, the company’s founder. ‘These are mom-and-pop investors who might own a car dealership or a bakery.’ Moreover, the report found that most Chinese seeking to buy overseas ‘wish to use leverage where possible,’ which may also have something to do with the need to circumvent Beijing’s $50,000-per-year limit on foreign transactions.”

“It all points to a group of foreign buyers that, while large and motivated, remain financially mortal, and can therefore be expected to panic alongside everyone else if Canada’s housing market begins to falter. And, as foreign money continues to flood both Toronto and Vancouver, there’s plenty of evidence of ultra-sketchy, speculative behavior that’s not limited to offshore buyers.”

“‘If the flow starts in a clandestine way there is no way to regulate it at the other end,’ says David Mulroney, former Canadian ambassador to China, adding that every time he spoke to university students in China he was asked whether it was true Canada is a haven for Chinese fraudsters. ‘We have no idea where the money is coming from, how it was sourced—all of it contributes to an alarming lack of awareness in the local real estate markets,’ says Mulroney.”

From News Limited in Australia. “Is the golden age of Australia’s Chinese property boom coming to an end? The buying frenzy that has seen local residents priced out of the market by foreign investors appears to be slowing, as a toughened stance from the banks and regulators takes effect. RT Edgar Toorak director Jeremy Fox told news.com.au Chinese demand in the top end of the Melbourne market had ‘completely dropped off.’”

“He recently lost a deal on a $12 million six-bedroom mansion at 9 Whernside Ave, Toorak, after the would-be buyer was unable to tick all the required boxes. ‘We had an agreement on price subject to FIRB approval and getting their money out of China, and that’s been the stopping point,’ he said.”

“This time last year, Mr Fox said, one-third of the properties he sold went to Chinese nationals. This month, not a single sale needed FIRB approval. ‘We’ve sold 22 properties this month and only one’s been to Chinese — and that was local, not overseas,’ Mr Fox said. ‘It’s been a combination of everything: getting money out of China, banks cracking down, the FIRB rules and application fee, the stamp duty increase. The whole thing’s just come together in the perfect storm.’”

The Hampstead & Highgate Express in the UK. “A developer advertising price reductions on a luxury development in Maida Vale? No you haven’t entered a parallel universe, just the north London property market in 2016. ‘You can thank global economics, Brexit jitters, Panama, stamp duty hikes, market corrections and the rest – for making your dream home that much more affordable,’ reads the advert, an admission that is disarming in its rarity.”

“Billed as ‘the best value brand new houses in Inner London,’ the eight properties in a gated development have been reduced from around £1.4 million according to Philip Green at Goldschmidt & Howland, to £1.295 million. This developer’s declaration is refreshing but their struggles are par for the course. More than one third of properties in Hampstead sold in the first quarter of this year achieved a sale price that was more than 10 per cent lower than the initial asking price, despite a surge in transactions.”

“And yet the number of ‘luxury’ new builds in some stage of planning or construction in inner London has risen by more than 40 per cent in 18 months, according to figures from buying agency Property Vision. The research found there are 19,000 units currently under construction across prime London postcodes compared with 13,400 units when the same survey was carried out 18 months ago. It offered a conservative estimate of 26,133 new ‘prime’ London units coming to market over the next few years compared to only 4,870 units sold for £700,000 or more on the second hand market in 2015.”

“‘The gap between the pipeline of new stock and the annual second-hand market in the wider area is large – very large,’ said Charlie Ellingworth, director at Property Vision. ‘The word ‘Prime’ has become overused in recent years, alongside ‘iconic’. As the market adjusts their real meaning will become apparent and those who believed the developers’ hyperbole may wish they had taken more time – and advice.’”

The Real Deal. “The Chinese investors buying up swaths of U.S. real estate may not always know what they’re doing, according to some real estate experts. ‘I’ve been surprised by the lack of sophistication of some Chinese institutional investors,’ John Liang, Xinyuan Real Estate’s managing director of U.S. operations, said during a panel on Chinese real estate investment at the Asia Society. Some are even missing the ‘basic finance 101 concept of risk and reward,’ he said.”

“The reason? Real estate in China is basically ‘a manufacturing business,’ he said — one builds, sells, and makes a profit. ‘The U.S. is way past that,’ he said, referring to the complexity of the trade here, with its myriad of regulations and financial gymnastics. ‘It’s a little ahead of what the Chinese are used to.’”

“Liang’s statements come amid complaints by some local players that demand from Chinese investors have pushed New York prices to unrealistic levels. Some of Liang’s fellow panelists, who included Wendy Cai-Lee of East West Bank, Beth Fisher of Corcoran Sunshine, Kai-yan Lee of Vanke USA Holdings and Arthur Margon of Rosen Consulting Group, agreed with his assessment that there remains a lack of knowledge among even the most active Chinese investors.”

“‘You do wonder what the underwriting criteria is with some of these purchases,’ Fisher said. ‘As a broker, you assume that they see into the future in ways that we sometimes don’t see, but it is a tad concerning on the supply side.’”

From Bloomberg. “A custom-built home in the heart of California’s Silicon Valley had its price cut by $500,000 last week after sitting on the market since the end of March — a move that would’ve been almost unfathomable a year ago and a signal that frenzied demand has peaked. The six-bedroom, five-bath house in Palo Alto is now listed for $7.5 million. It joins a growing inventory of high-end homes in the area that are taking longer to sell.”

“It’s a departure from recent years, when newly minted millionaires from tech initial public offerings raced against buyers from China to scoop up anemic inventory. ‘The seemingly inexhaustible well of very high-end buyers has proven exhaustible after all,’ said Dean Wehrli, a senior vice president at John Burns. ‘The peak is behind us, and that’s becoming clearer and clearer to builders and buyers.’”